Federal Reserve: rising inequality jeopardizes economic recovery

A top ranking member of the United States Federal Reserve cautioned economists this week that growing inequality within the US was worsening the odds of a quick return to the conditions of the pre-recession days.

Fed Board of Governors member Sarah Bloom Raskin was in
Washington, DC on Thursday, and during an address before the
Society of Government Economists and the National Economists Club
she said the widening gap between the rich and poor is just one of
the issues being investigated as attempts are made to rebound from
the financial crisis of 2009.

“In my view, the large and increasing amount of inequality in
income and wealth, which has been an ongoing development for
decades, may have exacerbated the crisis and I think more research
is required to determine whether it may also pose a significant
headwind to the recovery from the crisis for years to come,”
Raskin told the crowd. “So, while I am hopeful that pressures
will ease further as home prices continue to rebound, I also
believe that some of the restraints on the recovery may be quite
long-lasting.”

When the Pew Research Center released their findings on
inequality last month, they concluded that the wealthiest 7 percent
of Americans saw their average net worth surge by 28 percent when
the great recession ravaged a majority of US households. In that
same span between 2009 and 2011, those on the bottom 93 percent saw
their net worth drop 4 percentage points.

“It has been a very good recovery for those at the upper end
of the wealth distribution,” Paul Taylor of the Pew Research
Center wrote of his report, “But there has been no recovery for
the lower 93, which is nearly everybody.”

And as that trend is obvious to pollsters, economists are
worrying that a widening gap between sectors will reduce the
likelihood of a rebound anytime soon. Before Raskin touched on
inequality during this week’s address, she admitted that the
recovery process in the post-recession years has been “a very
weak one.”

According to Raskin, the problem stems from massive lay-offs in
the wake of the recession’s start that primarily had an impact on
workers of certain sectors that have been unable to find employment
elsewhere. Raskin said “currents of globalization and
technological change” meant that many Americans fired in 2009
have been unable to adopt for the jobs that are in demand
today.

“About two-thirds of all job losses in the recession were in
middle-wage occupations — such as manufacturing, skilled
construction, and office administration jobs — but these
occupations have accounted for less than one-fourth of the job
growth during the recovery. By contrast, lower-wage occupations,
such as retail sales, food service and other lower-paying service
jobs, accounted for only one-fifth of job losses during the
recession but more than one-half of total job gains during the
recovery. As a result of these trends in job creation, which could
well have been exacerbated by the severe nature of the crisis, the
earnings potential for many households likely remains below what
they had anticipated in the years before the recession,” she
said.

“The increase in economic activity and the decline in the
unemployment rate are, of course, welcome, but we still have a long
way to go to reach what feels like a healthy economy. In fact, the
pace of recovery has been slower than most had expected. The gap
between actual output and the economy's potential remains quite
large, according to estimates from the Congressional Budget Office,
and the unemployment rate today remains well above levels seen
prior to the recession, and well above the level that the Committee
thinks can be sustained once a full recovery has been
achieved,” added Raskin.

Thursday’s remarks by the Fed board member was actually the
third time in as many months that she warned of what widening
inequality was doing to America. During an event in New York City
last month, Raskin said, “Of course, it is not part of the
Federal Reserve's mandate to address inequality directly, but I
want to explore these issues today because the answers may have
implications for the Federal Reserve's efforts to understand the
recession and conduct policy in a way that contributes to a
stronger pace of recovery.”